Evaluating ESOPs: Questions that CXOs should ask

Nothing impacts the financial lifestyle of an employee more than owning equity in a successful start-up.

Although most senior-level employees are offered stock options as a part of their overall compensation when they join startups, they don’t really know how to evaluate the equity portion of their job offer. While offering ESOPs, it is advised that founders should have one-on-one discussions with the new joinee, talk about stock options, giving them a view into the company – possible liquidation prospects, funds raised, and the roadmap. This is where employees should step up too and ask pointed questions, get their facts right, and ensure that their ESOPs won’t just be money on paper for them.

Satheesh KV, ex-HR Director at Flipkart, says in a webinar,

Liquidity of ESOPs depends on the founder. But the employee should make sure that he/she understands the true value of ESOPs that are granted to them. They should demand formal letters for all ESOP-related documentation.

What really matters is the percentage of the company that the ESOP pool represents, how long it will take to vest, and the next liquidity event.

Deepak Abbot, former VP of Paytm says in another webinar,

ESOP privileged employees have a right to know the value of their options. They should have a sit down with the founders and ask questions they don’t have clarity into. Straight answers will help them stay prepared.

Questions on ESOPs that CXO level employees can ask during the offer stage discussion with founders:

Valuation of the company
Not all companies are the same. While some will become unicorns, others won’t. Asking the current valuation of your potential employer is necessary. Understand this number and ask about the roadmap. This is when you should evaluate their logic and see if they are really going in the right direction. Can you actually generate a good profit out of your granted options?
What percentage of the company do your ESOPs represent?
A large ESOP grant is attractive, but what percentage is that number of the total valuation? Suppose you get offers from 2 companies. While the first company offers you 1000 options out of 1,00,000, the second offers 500 out of 10,000. In this case, the offer of the second company is worth going for. You have more skin in the game here. Also, you need to have clear visibility into the ESOP pool. What is the present size of the ESOP pool and will it be diluted further in the future? These questions will help you better understand the founder’s vision.
Comparison between offered ESOPs and the market average
Some companies offer a cash component that is higher than the market average. They do this to offer less ESOPs. And some companies do the exact opposite. It is important for you to know this. The answer will help you understand if the company has aggressive cash or ESOP policies. The more successful the company the fewer options it generally offers. This comparison will help you evaluate your potential employer’s outlook and policies on team, culture, and rewards.
Exercising the ESOPs
When can you exercise your options? Yes, the grant letter and offer letter will have all the formal information, but ask these questions to the founders directly. Most companies have a policy according to which employees are required to exercise their options within 90 days of their departure from the company. If you don’t, your options will lapse and you can’t claim them. Know the ESOP policy well and be prepared for exercising your options beforehand!

The other questions you must ask regarding exercise are: What if you decide to leave the company before all your options have vested? Is there a policy for accelerated vesting in the time of a merger? Can you exercise your ESOPs early? Is there a possibility of a potential buyback in the upcoming years?
Existing fundraises
Employees should know all about the funds that the company has raised. Ask the founders directly. Ask them about the existing funding and the time until the next fundraising round. Not just do the value of your ESOPs depend on subsequent fund raíses but also this is a good way to evaluate the core value and strength of the business and understand the metrics that you might be working towards.
Roadmap and expansion plans
If you are joining a company at the CXO level, you become a key driver of the business. Knowing the roadmap and expansion plans is very important. Not only will you be able to align closely with the vision of the founder, but also help you understand the trajectory of your own growth in the organization.